Conflicts of interest, information provision, and competition in banking
By: Patrick Bolton, Xavier Freixas, Joel Shapiro.
Contributors: Freixas, Xavier.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10571; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10571.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Banks and banking.; Financial services.; product differentiation.; Competition.
Description: "In some markets, such as the market for drugs or for financial services, sellers have better information than buyers regarding the matching between the buyer's needs and the good's actual characteristics.  Depending on the market structure, this may lead to conflicts of interest and/or the under-provision of information by the seller.  This paper studies this issue in the market for financial services.  The analysis presents a new model of competition between banks, as banks' price competition influences the ensuing incentives for truthful information revelation.  We compare two different firm structures, specialized banking, where financial institutions provide a unique financial product, and one-stop banking, where a financial institution is able to provide several financial products which are horizontally differentiated.  We show first that, although conflicts of interest may prevent information disclosure under monopoly, competition forces full information provision for sufficiently high reputation costs.  Second, in the presence of market power, one-stop banks will use information strategically to increase product differentiation and therefore will always provide reliable information and charge higher prices than specialized banks, thus providing a new reason for the creation of one-stop banks.  Finally, we show that, if independent financial advisers are able to provide reliable information, this increases product differentiation and therefore market power, so that it is in the interest of financial intermediaries to promote external independent financial advice"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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